Looking to capitalize on the growing middle class by “cultivating and developing” talent and technology in China, Dolby Laboratories (NYSE: DLB) opened its first Research and Engineering Center in Beijing last year, and the audio-technology company’s investment in Asia is certainly not a small one.
Having only been open for six months, Dolby’s newest outpost in China has not yet officially released any new products. But a look at the evolving and growing technology market, estimated to be a billion-dollar opportunity, especially in the entertainment arena, suggests that both Dolby and China are likely to benefit from the audio products developed there.
Dolby spent 9.7 percent of its total revenue on research and development or $89.5 million, for the fiscal year 2010, which ended on Sept. 30, on these research efforts globally. While that amount is consistent with what Dolby has spent in this area in recent years, this Chinese expansion comes at a time when consumer-driven demand for technology is at an all-time high, and Dolby looks to take advantage of that.
The China office is consistent with Dolby’s ongoing efforts to expand globally. With six offices currently in the Greater China region, Dolby has built a strong presence throughout many segments of the entertainment and technology industries. With the development of the Research and Engineering center, Dolby will be bringing resources and materials to China in order to “invent new technology,” according to a press release. Dolby said it considered the location as a very strategic choice, with the idea being that Beijing close to many universities, the potential for a large talent pool is promising.
Based on recent sales figures, there is a strong chance that the new center in Beijing will focus largely on further developing audio technology for cinema in the Asian market. Since June 2010, Dolby has installed more than 1,000 Dolby Surround 7.1 systems, the company’s newest theatrical surround sound technology. China, in particular, is looking to outfit its cinemas with improved audio. In a press release from the company, Mahesh Sundaram, vice president of the Asia Pacific offices at Dolby, said “China has a dynamic entertainment market and is strategically important for Dolby.”
Those sentiments are reflected by one of China’s major cinema companies, Dadi Media Group Inc. Since December, Dadi has ordered over 600 Dolby Digital Cinema systems, which include Dolby Screen Servers and Digital Cinema Processors. This $16 million order signals a major transition for Chinese cinema, where the movie-going experience is notably less comfortable and immersing than other parts of the world.
While Dolby is seeing initial success in outfitting sound for Chinese cinema, that is not the only arena where Dolby can expect product growth. Andrew Murphy, an analyst at Piper Jaffray, said, “One product besides cinema that has some potential for Dolby in China is Dolby Digital, a codec for digital TV audio broadcasting. If the Chinese government made it a standard, which they are currently considering, it would be a meaningful positive for Dolby.”
While movie theaters in China are largely looking to benefit from Dolby’s presence in Beijing, television service providers, which are experiencing unprecedented amounts of subscribers are implementing Dolby technology in their services as well. One of China’s HD and video-on-demand providers, BesTV, is using Dolby audio in the highly populated Guangdong Province, and expecting to expand throughout the country. When announcing the partnership, Li Huai Yu, General Manager at BesTV, attributed the inclusion of Dolby technology with offering “an immersing entertainment experience at home and to advance IPTV industry development in China.”
When asked to comment on the competition that Dolby may face in China, Murphy said, “I’m not familiar with any premium audio codecs that would compete with Dolby aside from similar audio formats from DTS and SRS Labs.”
With the advancement of audio technology in cinema and television, China, and the Dolby Research and Engineering Center there, look to be catching up with many Western countries in terms of entertainment technology and experience. However, that is likely not the only area being developed in the Beijing center. With China’s steadily growing middle class, the demand for technology, and higher-end products especially, there are significant opportunities to expand sound with products like smartphones, personal computers, and home television sets.
According to Piper Jaffray, revenue from all of the Asia Pacific region was $126.1 million for the 2010 fiscal year, or 52 percent of all revenue. Murphy said, “I don’t know what percentage of total revenue was from China, but it could be over $100 million annually, particularly if Dolby was made standard in the Chinese broadcast standard for audio – that would mean all television sets sold in China would have to come equipped to decode Dolby audio, and Dolby gets paid on the decoders.”
Dolby is currently working on developing audio technology for all of these products in the United States and Europe. At the Research and Engineering center in Beijing, similar technology is being created to outfit China-based products of the same nature. Recently announcing plans to develop both an implementation licensing program specific to China, as well as a Chinese chip designer to create chip designs that support Dolby Digital Plus technology.
